How to Create the Life You Want (Part II)

In our previous article, we talked about how to start laying out a financial plan to achieve your life goals (e.g. travelling the world in retirement). That post looked specifically at drawing up a “road map” and set of SMART goals towards this end.

In this article, we’re going to focus more on the practical aspects of planning for the life that you want. For instance, we will be fleshing out “cash flow modelling” as well as some tips on how to invest and save towards your life goals.

All of this might sound very complicated, but it actually isn’t too difficult if you take a bit of time to digest some of the key concepts. We also encourage you to talk through these areas with an experienced financial adviser. This can be helpful, as a decent adviser should be able to assist in breaking down concepts and jargon which are difficult to understand.

With that said, let’s now look at some of these areas together…

#1 Cash flow modelling

This is really just a clever way of saying “planning your finances for future possible scenarios”, as well as “showing your current financial position in relation to where you want to be.”

In other words, cash flow modelling helps you understand how much money is coming and going out, right now. It helps you “stress test” your financial position, by imagining how your finances would cope in the event of future tragedy or challenges.

For instance, if you had a serious accident down the line and could no longer work, how would you keep afloat financially and continue to progress towards your future goals?

Thinking about these aspects of your financial plan might therefore reveal areas where you need to set contingency measures in place. For example, perhaps it makes sense to take out an income protection policy which will cover your outgoings in case you need to take a prolonged period off work in the future.

Cash flow modelling also helps you predict your future wealth, and the key steps and milestones which might affect its quantity, timing and rate of growth.

For instance, if you are currently working as a senior marketing manager on £55,000 a year, where might you expect to be in ten years? Do you expect your wage to significantly increase? If so, where might you commit that extra money which is coming in each month?

It might be, for example, that in such a case the extra income could be committed to overpaying on the mortgage. The intention here might be to pay off the house several years early, in order to save tens of thousands of pounds which might otherwise have been spent on paying off the mortgage interest.

It’s worth noting, however, that the future is impossible to predict and you cannot fully, accurately map out your future income and wealth. However, you can make decisions based on informed, sensible assumptions and establish appropriate contingencies in case things do not work out as you planned or expected.

This is where working with a seasoned, qualified financial planner can offer immense value. Many of them (such as those at Cedar House) will have worked with clients over many years or even decades, and know what kinds of challenges and opportunities might await you.

Financial planners also have extensive tax and financial knowledge to help you identify threats you might have missed, as well as exciting areas where you might earn further income or save on unnecessary tax. All of this adds up to help you work more constructively towards building the kind of life you want.

#2 Investment Planning & Management

Almost certainly, planning the future life you want will involve identifying an appropriate investment strategy, and putting it into action.

It is important to save, and it is a good idea to have a financial “buffer” in case of an emergency. However, interest rates are very low these days and are unlikely to rise anytime soon. Leaving tens of thousands in a bank account, therefore, it actually likely to decrease in value over time due to inflation being higher than the interest you can typically earn.

This is where investing can be very powerful. Over the course of twenty or thirty years, it isn’t uncommon for an investment portfolio to double or triple in size due to the power of compound interest. Indeed, sometimes the growth can be even higher.

However, to invest successfully you do need a number of things in place. First of all, you need to know what your goals are. For instance, is the purpose of your investment portfolio mainly to build up a retirement fund? Or, are you putting money aside to help cover your children’s university living costs?

Answering this question will help determine what kind of investments and investment strategy are appropriate for you.

Another important aspect of successful investing is to know your tolerance for investment risk. How much stomach do you honestly have for market downturns, for example, which can cause your investments to decline in value?

There’s nothing wrong with being more risk-averse if that is your temperament. However, you need to be honest with yourself and with your financial planner at the outset, as this will affect whether your investment portfolio is weighted more towards “higher risk, higher return” investments or “lower risk, lower return” ones.

Finally, regardless of the above, it is important to spread out your investment risk by investing in a wide range of assets and asset classes. Do not put all of your eggs in one basket. For instance, putting all of your money into the shares of one company is a very bad idea. If that company fails, then you risk potentially losing all of your money.

If, however, you invest your money in multiple stocks as well as in bonds, property and other types of assets, then if one company you invested in fails, you minimise your exposure to investment losses.

Over time, with a smart investment strategy in place, you can steadily build up your wealth over time, and work constructively and effectively towards the goals you have set out for your life.

Naturally, we would recommend that anyone interested in cash flow modelling or investing should first speak with a financial planner. Remember, your initial consultation is usually free and it can do wonders for your life plan to run your ideas past an experienced professional.

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